Key transactions of a standard form social infrastructure PPP

Phase 1: Design and construction

1. Finance Co borrows money from third-party D&C financiers in the form of loans or facility agreements. The money may be borrowed entirely up front, or in stages (such as through a facility arrangement).
2. Finance Co uses that money to fund the D&C Loan to Project Trust. The interest payments on this loan are capitalised.
3. Project Trust uses the money from the D&C Loan to fund the design and construction of the infrastructure asset, including payments to the D&C subcontractors.

The abovementioned transactions are illustrated in Figure 1 below.

Figure 1: D&C phase key transactions

End of design and construction phase

On completion of the D&C phase, the existing financing is unwound, and new long-term financing put in place for the O&M phase. The key transactions to give effect to this are:

4. Finance Co borrows money from third-party O&M financiers in the form of long-term loans or facility agreements.
5. Finance Co uses that money to fund the receivables purchase payment to the government.
6. The government uses the receivables purchase payment to finance the construction payment to Project Trust.
7. Project Trust uses the construction payment to repay the D&C Loan with Finance Co, plus the capitalised interest.
8. Finance Co uses the repayment of the D&C Loan to repay the D&C financiers.

The transactions expected at the end of the D&C phase are illustrated in Figure 2 below.

Figure 2: End of D&C phase key transactions

Phase 2: Operation and maintenance

9. The government pays availability payments (also known as 'service payments') to Project Trust over the life of the O&M phase. The amount of these payments is calculated to be sufficient to:
   – cover the interest and principal payments incurred by Finance Co to the third-party O&M financiers
   – pay subcontractors to operate and maintain the infrastructure and cover related costs during the O&M phase, and
   – provide a return on equity to the consortium members.
10. Project Trust pays some of the money received from the availability payments to subcontractors to operate and maintain the infrastructure and to fund a return on equity.
11. An amount is paid by Project Trust to the government in the form of licence payments.
12. Securitised licence payments are passed to Finance Co under the securitisation agreement between the government and Finance Co. In practice, therefore, Project Trust pays the licence payments directly to Finance Co.
13. Finance Co uses the securitised licence payments to fund the repayment of principal and interest to the third-party O&M financiers. As discussed above, the licence payments are calculated to be sufficient for Finance Co to repay its debt to the third-party O&M financiers.
14. Cash flows under the equalisation swap result in any increase in Finance Co’s cost of financing being paid by Project Trust to Finance Co. Any decrease in Finance Co’s cost of financing is paid by Finance Co to Project Trust.

The transactions expected during the O&M phase are illustrated in Figure 3 below.

Figure 3: O&M phase key transactions